Ukraine puts Scottish referendum into perspective

Salmond should heed Eddie George’s buried report

by David Marsh

Tue 4 Mar 2014

The sabre-rattling over Ukraine highlights the quirkiness of Scotland’s September referendum about the possible dissolution of the 307-year-old link to England. A military stand-off looms over Russia’s hold over its former vassal and home to the Black Sea Fleet. The Brits do things differently, in the form of an exercise in genteel democracy to decide whether a union generally deemed to be one of the world’s most successful should be broken up.

Alex Salmond, leader of the Scottish Nationalist Party and Scotland’s first minister, argues that an independent Scotland could continue to use the pound after a possible Yes vote – even if the UK government (as seems certain) refuses to enter a currency union. Accusations that Salmond is endangering the country’s future have intensified following the revelation by Edinburgh-based financial group Standard Life that it would consider moving operations southwards if the Scots vote for separation.

Salmond is an educated man who worked as an oil economist for the Royal Bank of Scotland in the 1980s. But he is persisting with some terrible errors of judgement. Everyone understands the emotional pull for a proud, noble and ancient land to enhance self-government. But the Scots have this already, in the shape of a Scottish parliament that has enabled the country to loosen the shackles of being governed by a parliament in London over which it often complains, normally with some self-righteousness, that it has little or no control.

Before the European decision to launch the euro in 1999, Eddie George, then governor of the Bank of England, commissioned an internal study at the central bank to explore whether currency unions could persist without political union. The Bank’s experts found, damningly, that in roughly 30 monetary unions extending back to 1707, when Scotland was forced (by financial calamity) to fuse with England, political union was in nearly all cases a prerequisite for sustainable functioning of a monetary union.

The travails of the euro in the last five years have demonstrated the truth of that argument.

George wished to maintain neutrality on whether the UK would join the European single currency. He believed that the report would prejudice the UK government’s political decision on whether to sign up. So the Bank of England chief suppressed all mention of the study, even internally. It has never seen the light of day.

Salmond says now the Bank of England and sterling are ‘as much Scotland’s assets as London’s assets’. He opines that Scotland could continue using sterling because it is an ‘internationally tradable currency’. All this is about as logical as the now-independent states (like Ukraine) that left the Soviet Union from 1991 opting to continue to use the rouble – instead of splitting up, as they did, into 15 new currencies.

Alistair Darling, the former UK chancellor of the exchequer (another Scot) and leader of the pro-union campaign, says the ‘sterlingisation’ of Scotland would put it in the same category as Panama, which unilaterally uses the dollar but has no power of any kind to influence US monetary policies. Other unflattering examples come to mind such as Montenegro, which has opted to use the euro even though it has no prospect of joining monetary union with the other Europeans.

An independent Scotland which pegged itself unilaterally to the pound, without the support of the UK authorities, would need a policy of severe demand restraint aimed at accumulating external credit balances to maintain fiscal and monetary stability. This would entail great costs – the opposite of the economic promises that the purveyors of Scottish independence are holding out.

Meanwhile the UK Treasury is maintaining a not-so-subtle campaign to show the Scots that they can gain some benefits from a halfway house in which they increase financial autonomy from the rest of the UK. From 2015 Scotland will have powers to issue as much as £2.2bn in bonds to fund infrastructure projects. These so-called ‘tartan’ bonds or ‘kilt-edged securities’ will be small in volume and stature – yet, in coming years, they may be the best legacy of Scotland's brave but ill-conceived bid for monetary and fiscal independence.